Will Microsoft Buy Yahoo?

By Michael Finnegan

During the last year there has been a lot of speculation about whether Microsoft will buy Yahoo!  Recently, after more than a year of on-off negotiations, Microsoft bid a reported $44.6 billion for Yahoo!

The main motivation for the bid was to challenge the market leader, Google.  Although Microsoft is the leading technology company, its position will not be secure unless it can generate a loyal internet audience.  It has been reported that Microsoft have been making a loss with their online business and acquiring Yahoo! may restore profitability.  With online ad spending expected to double in the next three years, there is a lot at stake.  Also Google’s free alternatives to Microsoft’s office software products means that their software business may have to deal with increasing competition.

It is estimated that Microsoft and Yahoo! combined could reach a slightly larger audience than Google.  However, according to Nielson Online, the two companies’ combined Search Engine market share in the US last November was just under 30% compared to Google’s 57.7%.  The 30% share represented a decline since last September.  If this trend is to continue, Microsoft and Yahoo!’s combined share will not even equal half of Google’s share.  Even with the proposed merger it looks extremely unlikely that they could catch up in the lucrative search market. 

However, combined, Microsoft and Yahoo! may represent a more attractive means of lead generation for advertisers. 
In addition Yahoo! has reported stronger performance in some Eastern markets which would be of benefit to Microsoft who have had some struggles with piracy issues in the East. 
Meanwhile, Yahoo! have had limited success with their attempt to compete more directly with Google with last year’s Panama upgrades and stock prices have dropped significantly in the last year.

While Yahoo! has not yet accepted the proposal, an email was issued to Microsoft employees last week from the president of Microsoft Platforms & Services, Kevin Johnson.  The email discussed the benefits of the deal and seemed confident that Yahoo! would accept and suggested that the transaction would close in the second half of 2008. 

Yahoo! responded that they would “carefully and promptly” consider Microsoft’s bid.  Some have predicted that Yahoo! will resist the offer and may even revert to using Google to run their search technology.